What is the average hedge fund return

Performance dispersion was slightly tighter than that observed in July. All sub-strategies were positive for the month, with all sub-strategies, except Long Biased Equity, extending gains seen in the prior two months. The strongest performing sub-strategy was Long Biased Diversified Growth, returning 2. All sub-strategies delivered positive performance.

Quantitative Equity Market Neutral was the strongest performing sub-strategy, up 0. Performance was positive among nearly all sub-strategies.

Sector focused funds performed particularly well after a difficult month in July. It is the weakest performing strategy year to date, with a return of 1. In just ten days in August the Taliban took control of towns and cities across Afghanistan, culminating in their arrival at the gates of Kabul on 15th August.

Equities Global equity performance was generally positive during August. Chinese equities continued to be adversely affected by government regulatory changes. Government bonds Government bond yields rose across the board in August. These asymmetries that we are referring to are best explained with an example.

SPY was launched in January which means the observation period covers exactly 20 years to January The chart shows the average of the positive returns for the two portfolios as well as the average of the negative returns.

The compound annual rate of return CARR of the two portfolios is shown in the legend while the frequencies of returns are displayed in the bars.

SPY, the passive long-only portfolio in this case, compounded at an annual rate of 6. Compounding at 6. Compounding at Arguably, this is a big difference. It is very unlikely that this difference can be explained away by imperfect performance data. Neither can this difference be explained using nomenclature from the traditional investment management side, namely the concepts of alpha and beta.

Note that the investment approach with the higher fees compounded at a higher rate on a net-of-fees basis. First, the average positive returns of the active portfolio are larger than the average negative returns.

In the case of the passive portfolio, these averages aremore or less symmetrical. In other words, the average positive return is roughly as large as the average negative return. Second, the frequency between positive returns versus negative returns is more asymmetric with the active portfolio.

These differences are material when compounding capital is concerned. If both the ratio of magnitude and the ratio of frequency were symmetrical compounding would be around zero.

The passive portfolio in Fig. The reason for this is essentially luck. This is the reason we quoted Mark Twain saying that the opposite of hedging is speculation, earlier in this document. The long-only, buy-and-hold SPY investor has been lucky that between and mid there was a slight asymmetry that allowed positive compounding. The Japanese investor investing locally was not so lucky.

If we repeat the exercise above using a Japanese equities index instead of a proxy for US equities, the compounding rate is negative.

The Topix Total Return Index compounded at 3. One aspect of risk management is the avoidance of losses, especially large ones. One reason for avoiding large losses is that it kills the rate at which capital compounds and it takes a long time to recover. Bottom line In summary, the value proposition of hedge funds is to have an attractive combination of these two asymmetries. These asymmetries allow high compounding of capital per unit of risk.

These asymmetries can also be implemented through passive means. For instance, an equity long-only investor can buy put options to hedge his portfolio from falling when the market falls. However, in this case the investor compromises the return. The idea of a hedge fund portfolio is not necessarily to pay for insurance but to achieve these asymmetries through active risk management instead of paying for insurance that compromises returns.

However, when compared to equity or corporate bond indices, hedge fund portfolios have lagged. Funds of funds underperformed everything including government bonds and commodities. The worst performing index shown in Fig. The various hedge fund products are somewhere in between equities and bonds when examined in this fashion. When examining the s, s, and s this seems to be close to the truth.

In the sand s hedge fund returns were indeed equity-like. Then in the s, which was essentially the back-end of an unprecedented, monetary-policy-baby-booming-technology-revolutionising-peace-dividend-induced equity bull market, hedge fund returns were akin to that of a bond portfolio. The saying is not working very well in this decade though, as hedge funds have underperformed both equities and bonds so far this decade.

Hindsight is a wonderful thing. If your grandma had invested in a well diversified portfolio of hedge funds in January , you would have done well. The average hedge funds portfolio is close to a multi-generational or all-time low. When measured by a rolling five-year return, hedge funds have reached a low of 0. However, since April , the balanced portfolio outperformed hedge funds on a five-year rolling basis.

Again, this is a big difference. One of the ironies of our time is that complex financial engineering by banks was perceived as one of the factors that led to the financial crisis and the collapse of universal banking as we know it. It is now the governmental agencies who are doing the complex financial engineering. In an asset liability management ALM context, long-term bonds are held irrespective of valuation. He noted that industry assets under management are now at a record high, and he doesn't believe passive funds will beat actively managed hedge funds forever.

Bollen also has some advice for investors who are trying to choose hedge funds for their portfolios. This is a BETA experience. You may opt-out by clicking here. More From Forbes. Nov 11, , pm EST. Nov 10, , pm EST. Nov 8, , am EST. Nov 5, , pm EDT. Oct 30, , pm EDT. Oct 29, , pm EDT.